Canadian Currency Weakens as Oil Falls, Nation Posts Trade Gap

Jan. 12 -- Canada’s dollar fell the most in almost two weeks as commodities tumbled and the nation unexpectedly posted a trade deficit, spurring speculation the economic recovery may not be as robust as investors anticipated.

The currency, which touched an almost three-month high yesterday, pared its gain for January to 1.3 percent after rising 16 percent last year. Crude oil, Canada’s biggest export, dropped as China moved to curb bank lending. The trade deficit in November was C$344 million ($333 million), a government report showed, compared with a median forecast for a C$500 million surplus in a Bloomberg survey of economists.

“If we’d seen this trade data in any other situation the reaction in the market would have been more muted, but after the good rally we’ve seen, the shorter-term players used it to lock in profits,” said Matthew Strauss, a senior currency strategist in Toronto at Royal Bank of Canada, the nation’s biggest lender.

The Canadian dollar, nicknamed the loonie, depreciated 0.6 percent to C$1.0396 per U.S. dollar at 4:21 p.m. in Toronto, from C$1.0335 yesterday, when it reached C$1.0253, the strongest since Oct. 15. The loonie weakened today as much as 0.8 percent, the most on an intraday basis since Dec. 30. One Canadian dollar buys 96.20 U.S. cents.

Government bonds rose, driving down the yield on Canada’s benchmark 10-year note as much as six basis points, or 0.06 percentage point, to 3.55 percent, the lowest level in three weeks. The price of the 3.75 percent note due in June 2019 gained 40 cents to C$101.54.

‘Risk Aversion’

The loonie fell versus 12 of its 16 most-traded counterparts tracked by Bloomberg, while the U.S. dollar rose against 14.

The yen, the No. 1 performer, climbed 1.8 percent to 87.49 versus the Canadian dollar as China’s central bank said it will raise reserve requirements for the nation’s banks. That increased the likelihood it may increase its benchmark interest rate, which reduced demand for higher-yielding assets.

“With China raising rates, risk aversion really played a factor today,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia.

Crude oil for February delivery tumbled 2.4 percent to $80.54 a barrel on the New York Mercantile Exchange. Copper for March delivery plunged as much as 4 percent to $3.305 a pound on the Comex division of the New York Mercantile Exchange. Gold for immediate delivery dropped 2.2 percent to $1,126.10 an ounce after touching $1,161.80 yesterday, the highest since Dec. 8.

Raw materials including oil, copper and gold account for half of Canada’s export revenue.

Strengthened Too Much

The Standard & Poor’s 500 Index dropped 0.9 percent.

“The Canadian dollar strengthened beyond where I think we should have last week,” said Shane Enright, a currency strategist in Toronto at Canadian Imperial Bank of Commerce.

The loonie gained 2.2 percent last week, the most since the five days ended Nov. 13. Its high for yesterday approached the closest it has come to parity with the U.S. dollar, C$1.0207 on Oct. 15, since it last traded on a one-for-one basis with the greenback in July 2008.

The Canadian dollar will reach parity in the next two to three months, RBC’s Strauss predicted.

The currency will weaken to C$1.06 by the end of 2010, according to the median forecast in a Bloomberg survey of 29 analysts and economists.

Rates and Housing

Bank of Canada adviser David Wolf in Ottawa yesterday indicated policy makers won’t soon raise interest rates to cool the nation’s housing market.

The lowest mortgage rates since the Korean War helped fuel a 67 percent increase in existing home sales in November from their January 2009 low. The Bank of Canada cut its benchmark lending rate to 0.25 percent in April and has committed to keeping it there through June unless the inflation outlook shifts to aid a recovery.

“If the bank were to raise interest rates to cool the housing market now -- when inflation is expected to remain below target for the next year and a half -- we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession,” Wolf said yesterday in Edmonton, Alberta.

Canada’s new-housing price index rose 0.4 percent in November from October, Statistics Canada said today in Ottawa.

Traders trimmed bets on future interest rate increases. The yield on the overnight index swap due in nine months, based on predictions for the Bank of Canada’s rate at that time, dropped to 0.37 percent, from 0.39 percent on Jan. 8 and 0.47 percent at the end of December.

Central-bank policy makers left the benchmark overnight lending rate unchanged at their last meeting in December. They meet next on rates on Jan. 19.